A Transaction Cost Analysis of IT Outsourcing

This research uses transaction cost theory to investigate IT outsourcing, allowing for intermediate modes of outsourcing. Results suggest that the governance mode chosen by firms to govern their IT activities is guided by cost-minimization considerations. The major transactional determinant of the governance mode choice is the need for technical and/or organization skills. This constitutes a strong endorsement for the Grossman and Hart (1986) proposition. In addition, the measurability of the supplier’s performance is found to be a main driver explaining outsourcing decisions. However, it appears that it is the measurability of supplier performance that is important, rather than the facility to observe and evaluate the process of this work. Finally, results tend to confirm that a high level of asset specificity embedded in human capital will dampen the probability of outsourcing IT activities, while other forms of asset specificity seem to have the opposite effect.